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The market started off on a good note after we got a great Durable Goods report in the morning.  We got a surprise 1.8% increase when Wall Street was expecting a 0.9% decline.  As a result, the Dow managed a triple-digit gain and ran up to 8,428 an hour or so into the session.  However, I mentioned the big Fed meeting and we needed them to say something powerful.  It could have been the wave the bulls might have surfed but instead the Fed’s comments led to a sell-off.  

 

The Dow was up about 40 points before the 2:20pm announcement and maybe jumped 10 points when the news was released but the bears quickly jumped in and all of the morning’s momentum was lost.

 

I had mentioned to watch for a breakout and confirm a strong move if you wanted to play the upside but we never got one and there was no trade on the S&P 500 June 925 calls (JXDFZ, $0.80, down $0.20).  I should have mentioned the puts but I thought there was a slight chance we get a breakout.  This only confirms our tight trading pattern I have been talking about.   

 

The good news is that we are getting some decent earnings reports and the companies reporting are seeing their stock price rewarded.  Oracle (ORCL, $21.26, up $1.39) rose 7% after they announced a strong quarter and Sonic (SONC, $9.81, up $1.01) added 11%.  I’ve done some Sonic blogs in the past but didn’t trust them this time around.

 

Some other things I want to talk about…the strangle trade on Monsanto (MON, $76.16, down $3.14).  This was a “show-and-tell” trade for the new option traders we have on board and it would have been a huge homerun.  The problem is that I couldn’t have updated the position on a “real-time” basis which is why we didn’t actually do the trade.  I know some of the more seasoned options traders jumped all over it and here is how it played out. 

 

The total cost of the trade would have been $535 (plus $10 in trading fees) as one call and one put option were trading for about $2.50 each on Tuesday.  One of the things I said was “and you are hoping one side of the trade doubles after the company announces earnings”.  Bingo.

 

The July 80 calls (MONGP, $1.40, down $1.95) were trading at $2.75 at the time I profiled the trade and soared to $4.10 right after the open.  The stock raced to $82 before trending lower the rest of the day.  You could have set stops at $3.90-$4.00 or when the stock fell back below $80 and collected that return.  Let’s say you even got stopped out at $3.75.  That is $375 back in your account.

 

The July 75 puts (MONSO, $2.60, up $0.60) traded to $3.10 and finished the day right at their profiled entry price so you could have closed them for $260.  That gives you $635+ or a ballpark return of 20% in one day.  Of course, you also could have kept the put options OPEN with the weak close we had and hope for more downside on Thursday or Friday.

 

Strangle (and straddle) options trades can work around earning announcements but as I’ve shown, you have to be at a computer or know what is going on in the market to pull one off most of the time.  Keep this in your playbook and remember this down the road when you get more experienced trading options.  Like I said, I don’t normally use these strategies but you can make some money if you know what you are doing.

 

Overall, it was a decent day as some of the trades we do have going held their ground.  Ford (F, $5.63, up $0.10) made a run towards $6 and hit a high of $5.90.  I have mentioned using a stop of $5 on the December call options we have open but make that a “loose” one.  I still believe Ford gets to $8-$10 by the end of the year so I don’t want everybody to bail right away if we do get a breakdown.

 

Bank of America (BAC, $12.35, up $0.12) was making a run at $13 but still managed a small gain.  The November 15 calls (BYOKO, $1.05, down $0.05) traded as high as $1.20 but finished the day lower.  This another position of where we have a 55 cent stop but I’m also inclined to leave it open if we do test those levels.  I don’t think we will but you never know with so many wild cards out there.

 

Cisco Systems (CSCO, $18.61, up $0.04) hit $19 which was a good sign and we are still holding the October 20 calls (CYQJD, $0.90, down $0.05).  The stop is 75 cents but we will probably keep this one open as well. 

 

Even if we do sell-off from here or when 2Q earnings roll in, there will be a market bounce.  We hit lows in November and got a bounce and hit lows again in March and got a HUGE bounce.  I don’t like the current environment but I try to take the emotions out of trading.  You have to or otherwise you won’t follow your game plan.

Rick Rouse